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  • Deductible expenses

    The following expenses for your rental property may be deducted over a number of income years:

    Depreciation

    When you purchase a rental property, for tax purposes, you are treated as having bought a building, plus various separate depreciating assets, such as air conditioners, stoves and other items.

    Some items found in a rental property are not treated as separate assets, and are depreciable, in their own right. An asset that is fixed to, or otherwise part of, a building or structural improvement, will generally be construction expenditure for capital works and only a capital works deduction may be available.

    When you purchase a rental property, each depreciating asset can be attributed a cost to enable a claim for decline in value, or 'depreciation'. In many cases at the time of purchase of the rental property, a quantity surveyor will prepare a report that creates a depreciation schedule for these claims.

    The decline in value of a depreciating asset starts when you first use it, or install it ready for use – it doesn't matter whether it is for a private purpose or to earn assessable income. For instance if you purchased an asset halfway through the financial year, eg on 1 January, and used it only for a taxable purpose, you can claim half of the first income year's decline in value, as long as the asset has remaining effective life.

    Your deduction needs to be reduced for any personal use of the asset.

    For assets costing $300 or less, you can claim an immediate deduction for the entire cost (to the extent you use it at a rental property). You can't do this if the asset is one of a set of assets that together cost more than $300 – for example, if you buy four dining chairs each costing $250, you can't treat them as separate assets to claim an immediate deduction.

    Methods of calculating depreciation deductions

    To work out your deduction for depreciation, use either the:

    • diminishing value method – the decline in value each year is a constant proportion of the remaining value or
    • prime cost method – the decline in value each year is a constant amount of the original value.

    Depreciating assets valued at less than $1,000 can be grouped in a low-value asset pool and depreciated together.

    Example

    Laura purchased a new hot water system for her rental property on 1 July 2017 for $1,500. It has an effective life of five years. She can choose to use either the diminishing value or prime cost method.

    Diminishing value method

    The formula for the annual decline in value using the diminishing value method is:

    asset's cost × (days held ÷ 365) × (200% ÷ asset's effective life)

    The decline in value for 2017–18 is $600, worked out as follows:

    1,500 × (365 ÷ 365) × (200% ÷ 5)

    Laura is entitled to a depreciation deduction of $600. The adjustable value of the asset on 30 June 2018 is $900. This is the cost of the asset ($1,500) less its decline in value to 30 June 2018 ($600).

    Prime cost method

    The formula for the annual decline in value using the prime cost method is:

    asset's cost × (days held ÷ 365) × (100% ÷ asset's effective life)

    The decline in value for 2017–18 is $300, worked out as follows:

    1500 × (365 ÷ 365) × (100% ÷ 5)

    Laura is entitled to a deduction equal to the decline in value. The adjustable value of the asset at 30 June 2018 is $1,200. This is the cost of the asset ($1,500) less its decline in value to 30 June 2018 ($300).

    End of example

    See also:

    Depreciating assets you can claim

    New

    You can claim for assets that are new, that is, not second-hand or used.

    This includes where you purchase a newly built property, or purchase a property that has been substantially renovated, if no one was previously entitled to depreciation deductions, and:

    • no one resided at the property before you acquired it, or
    • the depreciating assets were installed for use, or used at this property, and you acquired the property within six months of it being newly built or substantially renovated.

    Example

    Kerrie purchases an apartment off-the-plan from a developer as an investment. That is, it was new and no one lived in it prior to that.

    Kerrie also purchased a residential investment property from another developer four months after completion. It was already tenanted when Kerrie purchased it.

    Both of the properties incorporate depreciating assets such as curtains and furniture installed prior to settlement and the transfer of title to Kerrie.

    For the apartment, Kerrie is entitled to claim deductions for decline in value of the depreciating assets because no one has lived in it before she purchased it.

    For the tenanted property, Kerrie is still entitled to claim deductions for decline in value of the depreciating assets (although they have been used by the tenants) because:

    • no one claimed any deductions for decline in value of the depreciating assets
    • the property was supplied to Kerrie within six months of being built.

    Example

    On 10 May 2017, Julie entered into a contract to purchase a residential property from a developer to rent it out, which was newly built by the developer less than six months ago. It was already rented out by the developer to a couple. So the depreciating assets were previously used when Julie entered into this contract. The developer told Julie that he was not entitled to claim depreciation deductions on the assets at the property because they were his trading stock.

    Therefore, Julie can claim depreciation deductions for decline in value of the depreciating assets that were already in it because:

    • no one was previously entitled to claim depreciation deductions on those assets
    • even though people lived in the property after it was newly built, she entered into a contract to acquire it within six months (of the property being built or renovated).

    If Julie had entered into the contract to buy this property after six months of it being newly built, she would not have been entitled to claim depreciation deductions for any of the assets that were already in it at that time.

    End of example

    Second-hand

    You can claim deductions for second-hand or used depreciating assets if you:

    • purchased the asset before 7.30pm on 9 May 2017
    • installed it into your rental property before 1 July 2017.

    Example

    Sharon owns a residential property she has been renting out since September 2015. In March 2017, Sharon purchased a second-hand fridge to replace the fridge that had broken down.

    Because Sharon purchased the second-hand fridge for her rental property before 7.30pm on 9 May 2017, she can claim depreciation deductions for any remaining effective life of the asset.

    Example

    Sue purchased her house in 2009. In October 2017, she listed her house for sale. While it was advertised, she moved out and then replaced the carpet. No one lived in the house while it was advertised. The house was then sold to Tim. After purchasing the property, Tim rented it out immediately.

    Tim can't claim depreciation deductions for any of the depreciating assets in the property because they are all previously used. Also, he cannot claim depreciation deductions for the carpets because he did not own the asset when it was first installed ready for use.

    Example

    Don purchased a second-hand clothes dryer and installed it in his residential rental property on 8 May 2017. Assuming the dryer had five years of remaining effective life, Don can claim deductions for its decline in value for five years because he had purchased it before 9  May 2017. It doesn't matter whether the dryer was brand new or previously used.

    End of example

    Home turned into a rental property before 1 July 2017

    You can claim depreciation deductions in respect of assets in a home used for private purposes and turned into a rental property if you:

    • purchased your home before 7.30pm on 9 May 2017
    • turned your home into your rental property before 1 July 2017.

    Example

    At the start of 2016, Marty purchased a home as his main place of residence. In June 2017, Marty moved out and rented out the property fully furnished, which included the furniture and fittings he had been using while living there.

    As Marty rented out his home before 1 July 2017, and he purchased it before 7.30pm on 9 May 2017, he can claim depreciation deductions for any remaining effective life of the used depreciating assets in it.

    However, from the 2018 year, Marty cannot claim depreciation deductions for any second-hand depreciating asset that he purchases for this property on or after 7.30pm on 9 May 2017.

    If Marty's home was made available for rent on or after 1 July 2017, he would not have been able to claim depreciation deductions for any remaining effective life of the used depreciating assets in it.

    Marty can claim depreciation deductions for the new depreciating assets that he purchases for his rental property.

    Example

    Eliza purchased a dishwasher in July 2015 and used it for private purposes at her main residence. In July 2017, she installed this dishwasher in her residential rental property. Eliza can't claim deductions for the dishwasher's decline in value because:

    • she had previously used it privately
    • she installed it in her rental property after 30 June 2017.
    End of example

    See also:

    Depreciating assets you cannot claim

    Existing rental property purchased on or after 7.30pm (AEST) on 9 May 2017

    You cannot claim depreciation deductions for the assets in an existing rental property if you entered into a contract to purchase that property on or after 7.30pm (AEST) on 9 May 2017.

    Example

    In August 2017, Donna purchased a two-year old apartment and immediately rented it out. A year before Donna purchased the apartment, the previous owner installed new carpet and, upon purchasing the property, Donna installed a second-hand television.

    Donna can't claim depreciation for the decline in value of the carpet and the television because they have both been previously used.

    End of example

    Home turned into a rental property on or after 1 July 2017

    You can't claim depreciation deductions for assets that were in your home. You can claim depreciation deductions for any new depreciating assets that you purchase for your rental property.

    Example

    At the start of 2016, Kendrick purchased a home as his main place of residence. In August 2017, Kendrick moved out and rented out the property fully furnished, which included the furniture and fittings he had been using while living there.

    As Kendrick's home was made available for rent on or after 1 July 2017, he is not able to claim depreciation deductions for any remaining effective life of the used depreciating assets in it.

    Kendrick can claim depreciation deductions for the new depreciating assets that he purchases for his rental property.

    End of example

     These rules preventing a depreciation deduction do not apply if:

    • you are carrying on a business of property investing
    • you purchased a second-hand depreciating asset for your rental property before 7.30pm (AEST) on 9 May 2017 and it has not been used privately
    • you used a depreciating asset that you acquired before 7.30pm (AEST) on 9 May 2017 and then, before 1 July 2017, you installed it at your rental property
    • your property is not used to provide residential accommodation, for example it is let out for commercial purposes (such as a doctor’s surgery)
    • the entity owning the rental property is a corporate tax entity, a superannuation plan (except self-managed superannuation funds), a public unit trust, a managed investment trust, or a partnership or unit trust if each of its members are listed here
    • the income generating activities at your rental property are unrelated to providing residential accommodation (for example, solar panels used in generating income from the sale of electricity).
    Carrying on a business of property investing

    The receipt of income by you from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business.

    Whether a business is carried on must be answered based on a wide survey and your involvement in the activities. No one indicator is decisive. They must be considered in combination and as a whole.

    Some of the factors considered in determining whether you carry on a business of letting properties are:

    • total number of residential properties that are rented out
    • average number of hours per week you spend actively engaged in managing the rental properties
    • skill and expertise exercised in undertaking these activities
    • Whether professional records are kept and maintained in a business-like manner.

    Example

    Saania owns 16 rental properties, 14 of which are managed by real estate agents. Saania frequently attends personally to rental property matters, such as collecting rent and arranging for repairs to be done, She also undertakes regular analysis to measure the financial performance of her rental properties.

    Saania is not carrying on a business of property investing because the activities are no more than letting properties.

    Example

    Mr and Mrs Smith own a number of rental properties either as joint tenants or equal tenants in common. They own eight houses and three apartment blocks. Each block comprises six residential units. Hence, they own a total of 26 rental properties. The Smiths actively manage all of the properties. They devote a significant amount of time to these activities, that is, an average of 25 hours per week each. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and conduct all of the rent collections. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise for them to be done on their behalf.

    The Smiths are carrying on a rental property business. This is indicated by the following factors:

    • the significant size and scale of the rental property activities
    • the number of hours they spend on the activities
    • their extensive personal involvement in the activities
    • the business-like manner in which the activities are planned, organised and carried on.
    End of example

    Substantial renovations

    Substantial renovations of a rental property are renovations in which all, or substantially all, of a building is removed or is replaced. This could include the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

    For renovations to be substantial, they must directly affect most rooms in a building. The removal and replacement of the exterior walls, the removal of some internal walls, and the replacement of the flooring and the kitchen in a house are considered collectively to amount to substantial renovations.

    Example

    Jake bought a four bedroom residential property in October 2017 with the intent of it being a rental property. Three months before selling, the previous owners removed a wall between two bedrooms and turned the space into a large bedroom with an ensuite. They also repainted and recarpeted the room.

    Even though Jake acquired the property within six months of the renovations being completed, the renovations only impacted a part of the house, and aren't classified as being substantial renovations. In this case, Jake can't claim depreciation deductions for the decline in value of the depreciating assets in the property.

    However, if Jake buys any brand new depreciating assets for the property, he will be able to claim depreciation deductions for its decline in value.

    End of example

    Capital works expenditure

    Deductions for construction expenditure (capital works deductions) on residential rental properties are generally spread over a period of 40 years.

    You can claim a deduction if construction began after:

    • 17 July 1985 and the property is used for residential accommodation or to produce income
    • 19 July 1982 and the property is not used for residential accommodation (for example a shop)
    • 21 August 1979, the property is used to provide short-term accommodation for travellers and it meets certain other criteria.

    A deduction may also be available for structural improvements made to parts of the property other than the building if work began after 26 February 1992. Examples include sealed driveways, fences and retaining walls.

    The deduction is at the rate of 2.5% or 4% (adjusted for part-year claims) depending on the date the capital works began. Your total capital works deductions can't exceed the construction expenditure. No deduction is available until construction is complete.

    Deductions for construction expenditure apply to capital works such as:

    • a building or an extension – for example, adding a room, garage, patio or pergola
    • alterations – such as removing or adding an internal wall
    • structural improvements – such as adding a gazebo, carport, sealed driveway, retaining wall or fence.

    You can only claim deductions for the period in which the property is rented or is available for rent.

    If you have claimed, or could have claimed, a capital works deduction for construction expenditure:

    • you can't claim it as a deduction for decline in value of a depreciating asset
    • the amount already claimed must be excluded from the cost base of the asset.

    See also:

    Repairs on a newly-acquired rental property

    Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property are capital expenditure and may be claimed as capital works deductions.

    Replacing capital equipment

    If you have to replace something identifiable as a separate item of capital equipment (such as a complete fence or building, a stove, kitchen cupboards or a refrigerator), you may be able to claim the cost as a capital works deduction or a deduction for decline in value.

    Example

    Janet has owned and rented out a residential property since 12 January 1983. Recently, she replaced the old kitchen fixtures, including the cupboards and appliances. The old cupboards had deteriorated through water damage and wear and tear.

    The kitchen cupboards are separately identifiable capital items with their own function. This means the cost of completely replacing them is a capital cost. Because of this, Janet can claim:

    • a capital works deduction for the construction cost of this work  
    • a deduction for the decline in value of the kitchen appliances.

    This is the case regardless of whether or not any of the following apply:

    • new fittings are of a similar size, design and quality as the originals  
    • new cupboards are made from a modern equivalent of the material used in the originals
    • layout and design of the new kitchen may be substantially the same as the original.
    End of example

    Borrowing expenses

    You can claim a deduction for borrowing expenses associated with purchasing your property, such as loan establishment fees, title search fees, and costs of preparing and filing mortgage documents. Interest on the loan is not a borrowing expense, and can be claimed immediately.

    If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less.

    If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.

    What can you claim?

    You can claim all of the following as borrowing expenses:

    • stamp duty charged on the mortgage
    • loan establishment fees
    • title search fees charged by your lender
    • costs (including solicitors' fees) for preparing and filing mortgage documents
    • mortgage broker fees
    • fees for a valuation required for loan approval
    • lender's mortgage insurance, which is insurance taken out by the lender and billed to you.

    What are you unable to claim?

    You cannot claim any of the following as borrowing expenses:

    • loan balances for the property
    • stamp duty charged by your state or territory government on the transfer (purchase) of the property title
    • legal expenses including solicitors' fees for the purchase of the property (these are capital expenses)
    • stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (you may be able to claim this as a lease document expense)
    • insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed (this is a private expense)
    • borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to invest in a super fund).

    Stamp duty and legal expenses may be included in calculating the 'cost base' of the property for capital gains tax (CGT) purposes as they are capital expenses.

    If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment.

    If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year you had the loan.

    On 3 July 2010, Peter took out a 25-year loan of $300,000 to purchase a rental property. Peter's deductible borrowing expenses were:

    • $800 stamp duty on the mortgage
    • $500 loan establishment fees
    • $300 valuation fees required for loan.

    Peter also paid $1,200 stamp duty on the transfer of the property title. He cannot claim a tax deduction for this expense but it will form part of the ‘cost base’ of the property for capital gains tax (CGT) purposes when he sells the property.

    As Peter's borrowing expenses are more than $100, he must claim them over five years from the date he took out his loan for the property. He would work out the borrowing expense deduction for the first year as follows:

    2010–11 (363 days)

    Borrowing expenses multiplied by Number of relevant days in year divided by number of days in 5 years equals deduction for year

    $1,600 multiplied by 363 divided by 1,826 equals $318 deduction on his 2011 tax return

    The borrowing expense deductions for each other year would be worked out as follows:

    Borrowing expenses remaining multiplied by Number of relevant days in year divided by remaining number of days in 5 years equals deduction for year

    2011–12 (year 2 – leap year)

    $1,282 (that is, $1,600 minus $318) multiplied by 366 divided by 1,463 equals $320 deduction on his 2012 tax return

     2012–13 (year 3)

    $962 (that is, $1,282 minus $320) multiplied by 365 divided by 1,097 equals $321 on his 2013 tax return

    2013–14 (year 4)

    $641 (that is, $962 minus $321) multiplied by 365 divided by 732 equals $320 deduction on his 2014 tax return

    2014–15 (year 5)

    $321 (that is, $641 – $320) multiplied by 365 divided by 367 equals $319 deduction on his 2015 tax return

    2015–16 (year 6)

    $2 (that is, $321 minus $319) multiplied by 2 divided by 2 equals $2 deduction on his 2016 tax return

    End of example
     

    Duration 3m5s.

    Last modified: 13 Aug 2018QC 23636